Xiaomi, the Chinese smartphone maker, announced on Wednesday that it is planning to enter ten countries this year. By New Year’s Eve, you should be able to buy the Mi3 in India, Brazil, and Russia as well as Indonesia, Malaysia, Mexico, the Philippines, Thailand, Turkey, and Vietnam. Xiaomi is already selling phones in Mainland China, Hong Kong, Taiwan, and Singapore.
Cupertino should be worried. Xiaomi’s Mi3 in China is cheaper than the iPhone 5c—1,999 yuan versus 4,488—and better—the Xiaomi phone has a larger and sharper screen and a camera with higher-density pixels. Unless you insist on having a depiction of a piece of fruit on your device, you will go with the Xiaomi offering every time. No wonder Xiaomi outsells Apple in China according to research firm Canalys, shipping 7.3 million phones in the fourth quarter of last year. The American company came in at about 7 million in the period, enough for sixth place behind Xiaomi’s No. 5 ranking.
Xiaomi, which sold its first phone in September 2011, plans to ship 100 million of them next year. To reach that goal, it will have to go where the growth is. “The next half billion new smartphone customers will increasingly come mainly from poorer emerging markets, notably India and Africa,” states analytics firm IDC.
Xiaomi is particularly well positioned in the newest of the new markets. It is willing to accept razor-thin margins, pricing its phones in its home market just slightly above cost. “It’s definitely disrupting everyone,” says IDC’s Ryan Lai. “Now consumers expect phones with high-end specs at low prices.” As a result, Xiaomi has been pressuring competitors ZTE and Huawei, both Chinese brands.
And it looks like Samsung, the global smartphone leader, and iconic Apple are the next to be Xiaomied. Hugo Barra, who left Google last year to take the Chinese start-up global, publicly said this month that his company will use the same pricing model in foreign markets. That cannot be good news for market leaders accustomed to earning fat margins.
Those market leaders will have a respite of a few years because it’s clear that Chief Executive Lei Jun and Barra intend to leave the near-saturated Western Europe and U.S. alone. But eventually the pair will need to extend their company’s reach everywhere.
If successful in emerging markets—that’s close to a sure bet—Xiaomi will have achieved economies of scale that will allow it to launch an assault on developed countries, and the company will have the profits from new markets to fund the attack on mature ones. What Lei and Barra are doing is the business equivalent of Mao Zedong’s capture-the-cities-by-controlling-the-countryside strategy that proved so successful in the Chinese civil war in the 1940s.
Xiaomi is not invulnerable, however. One explanation why it is expanding into new markets is not to take over the world but to escape its home country. Even though it is a fearsome competitor, its ability to grow Chinese smartphone sales looks limited at best.
Why? After nine straight quarters of growth, China smartphone shipments are now shrinking.
The downturn began in the fourth quarter of last year, when manufacturers shipped 90.8 million smartphones, down 4.3% from the 94.8 million in Q3. China’s transition from 3G to 4G accounts for some of the falloff, as China Mobile’s 4G phones had not reached store shelves when its 4G network launched in December. Other reasons, according to IDC, include the popularity of phablets and a reduction in subsidies for phones with small screens.
One calendar quarter does not a trend make. But how about two of them? China’s “stumble” or “hiccup” continued into the first quarter of this year when smartphone shipments, according to the Ministry of Industry and Information Technology, fell 9.8% from the same quarter in 2013. Doug Young of the South China Morning Post believes the drop could have been as much as 15% when China Mobile data is taken into account. A double-digit fall in shipments of 3G handsets, which make up the bulk of the China market, was only partially offset by a small increase in 4G sales, he believes.
The issue for China will be whether smartphones—more than 80% of total Chinese phone sales—will recover after the 4G rollout is completed. They might if China’s trendy consumers replace 3G handsets with 4G ones.
In any event, the thinking is that the downturn is merely a blip, “temporary” in the words of Nomura. Young, the journalist, disagrees, arguing that the days of heady growth in China are over. Xiaomi, however, is not waiting for another disappointing quarter to find out who is right.
The China smartphone market has exploded three-fold in the last three years, and the country is now the world’s largest market. According to IDC, the 351 million smartphones shipped in China last year constituted more than a third of the world’s total. That’s impressive by any standard, but at some point the Chinese market has to come back to earth. Moreover, if China’s economy continues to underwhelm—another sure bet—consumption will suffer and with it smartphone sales.
Xiaomi is heading to ten new countries this year, and it’s not hard to figure out why.
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